BILL REQ. #:  S-2059.1 

READ FIRST TIME 02/25/09.   

     AN ACT Relating to exchange facilitators; adding a new chapter to Title 19 RCW; prescribing penalties; and providing an expiration date.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF WASHINGTON:

NEW SECTION.  Sec. 1   The legislature finds that there are no statutory requirements pertaining to persons who facilitate like-kind exchanges pursuant to section 1031 of the internal revenue code and associated treasury regulations. The purpose of this chapter is to create a statutory framework that provides some consumer protections to those who entrust money or property to persons acting as exchange facilitators.

NEW SECTION.  Sec. 2   The definitions in this section apply throughout this chapter unless the context clearly requires otherwise.
     (1) A person or entity "affiliated" with a specific person or entity, means a person or entity who directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the person or entity specified.
     (2) "Client" means the taxpayer with whom the exchange facilitator enters into an agreement as described in subsection (3)(a)(i) of this section.
     (3)(a) "Exchange facilitator" means a person who:
     (i)(A) Facilitates, for a fee, an exchange of like-kind property by entering into an agreement with a taxpayer by which the exchange facilitator acquires from the taxpayer the contractual rights to sell the taxpayer's relinquished property located in this state and transfer a replacement property to the taxpayer as a qualified intermediary, as defined under treasury regulation section 1.1031(k)-1(g)(4); (B) enters into an agreement with a taxpayer to take title to a property in this state as an exchange accommodation titleholder, as defined in internal revenue service revenue procedure 2000-37; or (C) enters into an agreement with a taxpayer to act as a qualified trustee or qualified escrow holder, as both terms are defined under treasury regulation section 1.1031(k)-1(g)(3); or
     (ii) Maintains an office in this state for the purpose of soliciting business as an exchange facilitator.
     (b) "Exchange facilitator" does not include:
     (i) A taxpayer or a disqualified person, as defined under treasury regulation section 1.1031(k)-1(k), seeking to qualify for the nonrecognition provisions of section 1031 of the internal revenue code of 1986, as amended;
     (ii) A financial institution that is (A) acting as a depository for exchange funds and is not facilitating an exchange or (B) acting solely as a qualified escrow holder or qualified trustee, as both terms are defined under treasury regulation section 1.1031(k)-1(g)(3), and is not facilitating an exchange;
     (iii) A title insurance company, underwritten title company, or escrow company that is acting solely as a qualified escrow holder or qualified trustee, as both terms are defined under treasury regulation section 1.1031(k)-1(g)(3), and is not facilitating an exchange;
     (iv) A person that advertises for and teaches seminars or classes, or otherwise makes a presentation, to attorneys, accountants, real estate professionals, tax professionals, or other professionals, when the primary purpose is to teach the professionals about tax-deferred exchanges or to train them to act as exchange facilitators;
     (v) A qualified intermediary, as defined under treasury regulation section 1.1031(k)-1(g)(4), who holds exchange funds from the disposition of relinquished property located outside of this state; or
     (vi) An affiliated entity that is used by the exchange facilitator to facilitate exchanges or to take title to property in this state as an exchange accommodation titleholder.
     (c) For the purposes of this subsection, "fee" means compensation of any nature, direct or indirect, monetary or in kind, that is received by a person or related person, as defined in section 267(b) or 707(b) of the internal revenue code, for any services relating to or incidental to the exchange of like-kind property.
     (4) "Financial institution" means a bank, credit union, savings and loan association, savings bank, or trust company chartered under the laws of this state or the United States whose accounts are insured by the full faith and credit of the United States, the federal deposit insurance corporation, the national credit union share insurance fund, or other similar or successor programs.
     (5) "Person" means an individual, corporation, partnership, limited liability company, joint venture, association, joint stock company, trust, or any other form of a legal entity, and includes the agents and employees of that person.
     (6) "Prudent investor standard" means the standard for investment as described under RCW 11.100.020.

NEW SECTION.  Sec. 3   An exchange facilitator may not bring a suit or action for the collection of compensation in connection with duties performed as an exchange facilitator unless the exchange facilitator alleges and proves that he or she was fully in compliance with this chapter at the time of the offering to perform or performing an act or service regulated under this chapter.

NEW SECTION.  Sec. 4   (1) Except as provided under subsection (2) of this section, a person who engages in business as an exchange facilitator shall notify all existing exchange clients whose relinquished property is located in this state, or whose replacement property held under a qualified exchange accommodation agreement is located in this state, of any change in control of the exchange facilitator. Notification must be provided within ten business days of the effective date of the change in control by hand delivery, facsimile, electronic mail, overnight mail, or first-class mail, and must be posted on the exchange facilitator's internet web site for at least ninety days following the change in control. The notification must set forth the name, address, and other contact information of the transferees.
     (2) If an exchange facilitator is a publicly traded company or wholly owned subsidiary of the publicly traded company and remains a publicly traded company or wholly owned subsidiary of the publicly traded company after a change in control, the publicly traded company or wholly owned subsidiary of the publicly traded company is not required to notify its existing clients of the change in control.
     (3) For purposes of this section, "change in control" means any transfer of more than fifty percent of the assets or ownership interests, directly or indirectly, of the exchange facilitator.

NEW SECTION.  Sec. 5   (1) A person who engages in business as an exchange facilitator shall:
     (a) Maintain a fidelity bond or bonds in an amount of not less than one million dollars executed by an insurer authorized to do business in this state; or
     (b) Deposit an amount of cash or securities or irrevocable letters of credit in an amount of not less than one million dollars into an interest-bearing deposit account or a money market account with the financial institution of the exchange facilitator's choice. Interest on that amount accrues to the exchange facilitator; or
     (c) Deposit all exchange funds in a qualified escrow account or qualified trust, as both terms are defined under treasury regulation section 1.1031(k)-1(g)(3), with a financial institution and provide that a withdrawal from that escrow account or trust requires the exchange facilitator's and the client's written authorization.
     (2) A person who engages in business as an exchange facilitator may maintain a bond or bonds or deposit an amount of cash or securities or irrevocable letters of credit in excess of the minimum required amounts under this section.
     (3) The requirements under subsection (1)(a) of this section are satisfied if the person engaging in business as an exchange facilitator is listed as a named insured on one or more fidelity bonds that have an aggregate total of at least one million dollars.
     (4) An exchange facilitator must provide evidence to each client that the requirements of this section are satisfied before entering into an exchange agreement.
     (5) Upon request of a current or prospective client, or the attorney general under chapter 19.86 RCW, the exchange facilitator must offer evidence proving that the requirements of this section are satisfied at the time of the request.

NEW SECTION.  Sec. 6   (1) A person who claims to have sustained damages by reason of the fraudulent or dishonest acts of an exchange facilitator or an exchange facilitator's employee may file a claim on the fidelity bond or approved alternative described in section 5 of this act to recover the damages.
     (2) The remedies provided under this section are cumulative and nonexclusive and do not affect any other remedy available at law.

NEW SECTION.  Sec. 7   (1) A person who engages in business as an exchange facilitator shall:
     (a) Maintain a policy of errors and omissions insurance in an amount of not less than two hundred fifty thousand dollars executed by an insurer authorized to do business in this state; or
     (b) Deposit an amount of cash or securities or irrevocable letters of credit in an amount of not less than two hundred fifty thousand dollars into an interest-bearing deposit account or a money market account with the financial institution of the exchange facilitator's choice. Interest on that amount accrues to the exchange facilitator.
     (2) A person who engages in business as an exchange facilitator may maintain insurance or deposit an amount of cash or securities or irrevocable letters of credit in excess of the minimum required amounts under this section.
     (3) The requirements under subsection (1)(a) of this section are satisfied if the person engaging in business as an exchange facilitator is listed as a named insured on one or more errors and omissions policies that have an aggregate total of at least two hundred fifty thousand dollars.
     (4) An exchange facilitator must provide evidence to each client that the requirements of this section are satisfied before entering into an exchange agreement.
     (5) Upon request of a current or prospective client, or the attorney general under chapter 19.86 RCW, the exchange facilitator must offer evidence proving that the requirements of this section are satisfied at the time of the request.

NEW SECTION.  Sec. 8   (1) A person who claims to have sustained damages by reason of an unintentional error or omission of an exchange facilitator or an exchange facilitator's employee may file a claim on the errors and omissions insurance policy or approved alternative described in section 7 of this act to recover the damages.
     (2) The remedies provided under this section are cumulative and nonexclusive and do not affect any other remedy available at law.

NEW SECTION.  Sec. 9   (1) A person who engages in business as an exchange facilitator shall act as a custodian for all exchange funds, including money, property, other consideration, or instruments received by the exchange facilitator from, or on behalf of, the client, except funds received as the exchange facilitator's compensation. The exchange facilitator shall hold the exchange funds in a manner that provides liquidity and preserves principal, and if invested, shall invest those exchange funds in investments that meet a prudent investor standard and satisfy investment goals of liquidity and preservation of principal. For purposes of this section, a violation of the prudent investor standard includes, but is not limited to, a transaction in which:
     (a) Exchange funds are knowingly commingled by the exchange facilitator with the operating accounts of the exchange facilitator, except that the exchange facilitator's fee may be deposited as part of the exchange transaction into the same account as that containing exchange funds, in which event the exchange facilitator must promptly withdraw the fee;
     (b) Exchange funds are loaned or otherwise transferred to any person or entity, other than a financial institution, that is affiliated with or related to the exchange facilitator, except that this subsection (1)(b) does not apply to the transfer of funds from an exchange facilitator to an exchange accommodation titleholder in accordance with an exchange contract;
     (c) Exchange funds are invested in a manner that does not provide sufficient liquidity to meet the exchange facilitator's contractual obligations to its clients, unless insufficient liquidity occurs as the result of: (i) Events beyond the prediction or control of the exchange facilitator including, but not limited to, failure of a financial institution; or (ii) an investment specifically requested by the client; or
     (d) Exchange funds are invested in a manner that does not preserve the principal of the exchange funds, unless loss of principal occurs as the result of: (i) Events beyond the prediction or control of the exchange facilitator; or (ii) an investment specifically requested by the client.
     (2) Exchange funds are not subject to execution or attachment on any claim against the exchange facilitator.

NEW SECTION.  Sec. 10   A person who engages in business as an exchange facilitator must administer each of his, her, or its places of business under the direct management of an officer or an employee who is either:
     (1) An attorney or certified public accountant admitted to practice in any state or territory of the United States; or
     (2) A person who has passed a test specific to the subject matter of exchange facilitation.

NEW SECTION.  Sec. 11   A person who engages in business as an exchange facilitator shall not:
     (1) Knowingly or negligently make a false, deceptive, or misleading material representation, directly or by implication, concerning a like-kind transaction;
     (2) Knowingly or negligently make a false, deceptive, or misleading material representation, directly or by implication, in advertising or by any other means, concerning a like-kind transaction;
     (3) Engage in any unfair or deceptive practice toward any person;
     (4) Obtain property by fraud or misrepresentation;
     (5) Fail to account for any moneys or property belonging to others that may be in the possession or under the control of the exchange facilitator;
     (6) Knowingly commingle funds held for a client in any account that holds the exchange facilitator's own funds, except as provided in section 9(1)(a) of this act;
     (7) Knowingly keep, or cause to be kept, any money in any bank, credit union, or other financial institution under a name designating the money as belonging to the client of any exchange facilitator, unless that money belongs to that client and was entrusted to the exchange facilitator by that client;
     (8) Fail to fulfill its contractual duties to the client to deliver property or funds to the taxpayer in a material way unless such a failure is due to circumstances beyond the control of the exchange facilitator;
     (9) Commit, including commission by its owners, officers, directors, employees, agents, or independent contractors, any crime involving fraud, misrepresentation, deceit, embezzlement, misappropriation of funds, robbery, or other theft of property;
     (10) Fail to make disclosures required by any applicable state law; or
     (11) Negligently make any false statement or knowingly and willfully make any omission of material fact in connection with any reports filed by an exchange facilitator or in connection with any investigation conducted by the department of financial institutions.

NEW SECTION.  Sec. 12   (1) An exchange facilitator must deposit all client funds in:
     (a) For accounts with a value of five hundred thousand dollars or more, a separately identified account, as defined in treasury regulation section 1.468B-6(c)(ii), for the particular client or client's matter, and the client must receive all the earnings credited to the separately identified account; or
     (b) For accounts with a value less than five hundred thousand dollars, (i) a pooled interest-bearing trust account if the client agrees to pooling in writing; or (ii) if the client does not agree to pooling, in a separately identified account, as defined in treasury regulation section 1.468B-6(c)(ii).
     (2) An exchange facilitator must provide the client with written notification of how the exchange proceeds have been invested or deposited.

NEW SECTION.  Sec. 13   A person who engages in business as an exchange facilitator and who intentionally violates section 11 (1) through (7) of this act is guilty of a class B felony under chapter 9A.20 RCW.

NEW SECTION.  Sec. 14   A person who engages in business as an exchange facilitator and who intentionally violates section 11 (10) or (11) of this act is guilty of a misdemeanor under chapter 9A.20 RCW.

NEW SECTION.  Sec. 15   (1) Exchange facilitators must provide the director of financial institutions with a report of exchange facilitator activity by December 31, 2009. The director may by rule create a format for the report, which must cover the period of January 1, 2009, through December 31, 2009. The report may only include the following information for exchange facilitation activity in Washington state:
     (a) The total number of property exchanges facilitated by the exchange facilitator;
     (b) The total dollar volume of property exchanges facilitated by the exchange facilitator;
     (c) The primary type of business the exchange facilitator engages in if the primary type of business is not exchange facilitation, including a description of any required licenses; and
     (d) The percentage of the exchange facilitator's business that is exchange facilitation, both by client and by gross income.
     Any information provided by an exchange facilitator in this report that constitutes a trade secret as defined in RCW 19.108.010 is exempt from the disclosure requirements in chapters 42.17 and 42.56 RCW, unless aggregated with information supplied by other exchange facilitators in such a manner that the individual information of an exchange facilitator is not identifiable.
     (2) Any information produced or obtained in examining an exchange facilitator under this section is exempt from disclosure as provided in RCW 42.56.270.
     (3) The director must compile the reports from exchange facilitators and report to the financial institutions and insurance committee of the house of representatives and the financial institutions, housing and insurance committee of the senate by January 15, 2010.
     (4) This section expires June 1, 2010.

NEW SECTION.  Sec. 16   A person who violates this chapter is subject to civil suit in a court of competent jurisdiction.

NEW SECTION.  Sec. 17   The legislature finds that the practices covered by this chapter are matters vitally affecting the public interest for the purpose of applying the consumer protection act, chapter 19.86 RCW. A violation of this chapter is not reasonable in relation to the development and preservation of business and is an unfair or deceptive act in trade or commerce and an unfair method of competition for purposes of applying the consumer protection act, chapter 19.86 RCW.

NEW SECTION.  Sec. 18   Sections 1 through 17 of this act constitute a new chapter in Title 19 RCW.